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Chapter 13 Plan Payments and Tax RefundsEveryone loves saving money on their taxes, and Chapter 13 debtors are fully eligible to take certain tax deductions if their plan payments are comprised of deductible items. For instance, most 30-year home mortgages are not only front-loaded with interest payments, but any mortgage payments you are making up through your Chapter 13 trustee are likely entirely comprised of mortgage interest and late fees that are tax deductible if you itemize your deductions on your tax return. Let’s take a look at what portion of those payments may be deductible.

  1. Mortgage Arrears: Mortgage servicers will probably not send you a Form 1098 that reports to the IRS how much mortgage interest you’ve paid through a Chapter 13 trustee. The reasons why are beyond this article, but all you’ll need to do is ask your attorney to get a copy of your Chapter 13 payments report for the year that will give you a breakdown of how much money was distributed to your mortgage holder. Your attorney may charge a small fee for this, but the tax savings are almost always worth it.  Because the IRS will not have received a 1098 from the loan servicer, your chances of being audited could increase.
  2. Back Taxes: Many debtors are also paying back state or property taxes through their Chapter 13 payment plan, and these payments may be deductible from your current year’s tax return. Not only can Chapter 13 force the state into a 5 year payment plan at a low interest rate, but you can deduct those payments from each tax year.
  3. Business Expenses: A business Chapter 13 is actually a misnomer because only individuals can file Chapter 13. But trustees often designate self-employed individuals as “business” Chapter 13’s and require a significant amount of documentation and a separate questionnaire to be filled out. If you are paying business debts or leases that you’ve personally guaranteed or sales taxes through the Chapter 13 plan, you may be able to deduct these expenses from your taxable income.